There are two prevailing notions among borrowers when it comes to student loans and bankruptcy. The first is that student loans work just like credit cards; if you get too far over your head, you can declare bankruptcy and get a fresh start. The second is that it is impossible to discharge student loan debt through bankruptcy.
The reality is that neither is right.
Bankruptcy Law and Student Loans in Most States
The law in the vast majority of states makes it very difficult, but not impossible, for student loans to be discharged in bankruptcy. (If you are interested in reading the seminal case on student loan bankruptcy, it is Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987).
The bankruptcy court will require the debtor to prove:
1) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans;
2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
3) that the debtor has made good faith efforts to repay the loans.
Bankruptcy Rules in the Other States
The remaining states (Arkansas, Iowa, Maine, Massachusetts, Minnesota, Missouri, Nebraska, New Hampshire, North Dakota, Rhode Island, and South Dakota) use what is called the totality of the circumstances test.
The rule states that “reviewing courts must consider the debtor’s past, present, and reasonably reliable future financial resources, the debtor’s reasonable and necessary living expenses, and ‘any other relevant facts and circumstances.’ The debtor has the burden of proving undue hardship by a preponderance of the evidence. The burden is rigorous. ‘Simply put, if the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt – while still allowing for a minimal standard of living – then the debt should not be discharged.’” Educational Credit Management Corp. v. Jesperson, 571 F.3d 775, 779 (8th Cir. 2009).
When to Hire an Attorney
If you feel that your situation meets the strict standards described here, you will want to contact an attorney to help you.
If your financial situation is so dire that you believe you qualify to have your loans discharged, paying for an attorney will be difficult. It will also be difficult finding someone with past success getting student loans discharged.
However, it is worth spending some time reaching out to professionals who can help, and attorneys in this field will have experience working out payment with people in similar situations.
Remember, your lender will fight hard to prevent your loans from going away. They have attorneys who fight student loan discharge every day, and the law is on their side.
Getting rid of your student loans through bankruptcy is very difficult, but not impossible. If you are going to attempt to go this route, the deck is stacked against you, but it can be done.
If you are interested in pursuing student loan discharge through bankruptcy, you may want to read over the following resources:
If you think you have a case for a bankruptcy discharge of your student loans, check out our tips for finding a student loan attorney.